Opec cuts working for now. What’s next?
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london — When Opec and its allies gather this week, they’ll have the best evidence yet that their efforts to clear a global oil glut are succeeding. It may prove short-lived.
Crude prices have rebounded to a three-month high and the world’s bloated fuel inventories are shrinking, signalling that nine months of production cuts by the alliance of the Organisation of Petroleum Exporting Countries and nations including Russia are at last paying off. Yet as US shale oil continues to thrive and seasonal demand wanes, the surplus that has weighed on markets for three years looks set to come back.
“The strategy finally has a window of opportunity in which it can work,” said Ed Morse, head of commodities research at Citigroup in New York. Even so, “Opec has clearly lost the long-term battle against shale.”
Opec and Russia have spearheaded an effort to rebalance world markets, seeking to end a price rout that has battered oil producers’ economies since 2014. After production cuts as deep as 1.8 million barrels a day, a committee will review progress on September 22, before ministers meet in November to decide if the strategy needs more time to achieve its goals.
As they discuss the market this week in Vienna, officials will be looking at much more favourable market indicators than at previous meetings. Opec members are together making almost all the supply reductions they pledged, and for the first time since the agreement started in January, their 10 outside partners have also delivered all of their promised cutbacks.
As a result, the surplus in oil stockpiles has diminished. Excess inventories in developed economies, measured against their fiveyear average, have declined by about 74 million barrels, or 28 per cent, since the start of the year, according to the International Energy Agency.
Dwindling stockpiles are being reflected in prices. Brent crude, the international benchmark, has gained more than 20 per cent since June 21 to $55.65 a barrel as of 10.42am in London. The discount on immediate supplies of Brent compared with later months — a sign of surplus that has prevailed for most of the past three years — has turned into a premium. The price of cargoes of North Sea crude such as Forties and Ekofisk rose to multiyear highs this month. — Bloomberg